Solaris Oilfield Infrastructure, (NYSE:SOI) is a company we haven't covered previously, but one I thought we should cover as it completes the frac round up. First we have the pressure pumping provided by Liberty Oilfield Services, (LBRT), then we have the proppant provided by U.S. Silica Holdings, (SLCA), and lastly we come to a pure-play silo storage company, SOI. This company has ridden the downturn while remaining cash flow positive and paying a dividend yielding 7%. This is an unusual combination in the wreckage that constitutes the oilfield these days, or at least Frac-verse portion of it.
Given all of that it was only natural to complete my beaten-down oilfield trilogy with them. You can see from the graphic above that sentiment toward this sector has been so bad they have never really recovered from the lows set in late March. That can't be justified in company generating free cash and having no debt on the balance sheet.
I think the company will experience continued growth in Q-4 if the current softness, that we note in the graphic below, remains a blip. As noted in the title, $40 is the magic number.
Primary Vision, Chart by author
SOI is in the business of streamlining the sand management system on the rig. Their equipment can provide 2.5 million pounds of wellsite proppant storage in the footprint of two flatbed trailers. Solaris' six-silo system contains three times the on-site sand storage capacity in half the space of a conventional SandKing system. The vertical tank system is scalable and in the 12-silo configuration provides 5 million pounds of proppant storage and can deliver sand at an average rate of 23,000 pounds per minute.
SOI equipment is shown in the vertical silos in the pic above. On the left sand trucks are discharging into the silos. The horizontal tanks are filled with water.
Their system allows up to 24 frac sand trucks to simultaneously unload proppant into six silos, even during pumping operations. Greater unloading capacity during all stages of frac operations means customers never have to shut down operations to wait on sand- there is a saying in pumping operations, "never stop pumping once you start, until you are done."
This system can reduce time between stages to as little as 30 minutes and have seen up to a 50% increase in the number of stages pumped per day when compared to traditional sand handling methods. The Solaris Mobile Proppant Management System was designed to be highly mobile and easy to rig up and down on site.
So improving efficiency, saving time, and reducing HSE exposure to silica dust is their stock in trade and as the industry gets back on its feet, SOI should profit.
Nor can one ignore the HSE implications of sand management. Silica is a known carcinogen and the dust generated from operation is subject to OHSA regulations. Keeping dust out of the air and water just makes sense and is central to the thesis for SOI.
SOI sustained a net loss of $3.3 mm, or $(0.12) per diluted Class A share, for the quarter ended September 30, 2020. Adjusted EBITDA was $3.1 mm for the quarter same period. Cash from operations was $3.7 mm for the quarter. This resulted in positive free cash flow of $2.3 mm And, finally they paid their regular quarterly dividend of $0.105 per share.
During Q-3, an average of 34 mobile proppant management systems were fully utilized, a 70% increase from the 20 fully utilized systems averaged in the prior quarter. The increase in fully utilized systems was primarily due to a rebound in active frac crews that began at the end of the second quarter of 2020. The company expects its fourth quarter 2020 activity could be flat to modestly higher, depending somewhat on seasonal timings.
Bill Zartler, SOI CEO had some positive commentary in their Q-3 call-
“As our customers returned to a modest level of activity in the third quarter, the Solaris team was ready to help them get back to work and as a result, delivered another quarter of solid results and positive free cash flow. We are cautiously optimistic about further activity recovery in the coming year and remain committed to helping our customers operate more efficiently through well site innovation. We also remain committed to our shareholders by continuing to run as lean as possible, paying a dividend and maintaining our debt-free balance sheet.”
Solaris Lens provides critical real-time data enabling logistics and dispatch teams to operate more efficiently, with the goal of minimizing demurrage and optimizing the timing of deliveries-saving time and money. The platform provides real-time inventory levels at various stages of the supply chain, visible both at the wellsite and remotely via any browser or the Solaris Lens mobile app. Data available at a glance includes inventory levels at the mine and wellsite by mesh size, fill and unload rates in each silo, and number of trucks carrying inventory in transit, at the wellsite or at/en route to the mine or transload.
Bill Zartler comments on Solaris Lens-
We have recently partnered with Amazon Web Services to help us achieve these goals. We’ve worked closely with Amazon to enable Solaris Lens provide storage and analytics of trillions of events per day, up to a 1,000 times faster than a server and a fraction of the cost of traditional relational databases. These data time series when fully integrated are able to provide the backbone for data driven frac improvements.
This the type of tech support that clients expect in the modern oilfield today. At the company's estimation their equipment is used on 1/3 of the frac jobs happening in North America today. It's not just dumb iron that gets the job done. Putting tech to work saves manpower and improves efficiency.
At the end of Q-3, the Company had approximately $60.9 million of cash on the balance sheet, which reflects over $1.36 per fully diluted share of available cash. The Company’s $50.0 million credit facility remains undrawn. No debt.
I like what I see in SOI. They have managed to avoid the debt pitfall that has overwhelmed, or threatens to, so many similar companies in this space.
Kyle Ramcharan, CFO comments-
As we think about our future, more broadly, we believe Solaris is uniquely positioned to take advantage of many opportunities. We have a low cost structure, no debt and excess cash in the balance sheet, many R&D opportunities and we pay a dividend. We will continue to opportunistically and thoughtfully evaluate both organic and inorganic growth opportunities and remain committed to returning cash to our shareholders.
The company is selling for 15X EV/EBITDA at current valuations. Normally multiples above 10 scare you. But in the case of Solaris the EV is the capitalization of the company, as there is no debt, so I don't find this off-putting.
I don't expect any decline in shares. If SOI interests you there is no reason not to take position at current levels. If the recovery is stretched out due to weakening oil prices, you have the nice and very competitive dividend to count on while you wait for share appreciation.
This will come. As we've said in numerous articles the current low level of oilfield activity is unsustainable if shale production is to be maintained. In that scenario SOI could easily rebound to the $14-15 range it saw earlier this year.
This article was written by
I am an oilfield veteran of 38+ years. Retired from Schlumberger since 2015. My background is drilling and completion fluids. I have authored a number of technical papers on completion topics. I have worked around the world- Brazil, Russia, Scotland, and the Far East. I still maintain a training and consulting practice and am always willing to help people who want to learn.
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